Buying a house may be the biggest purchase of your life, so you want to make sure you do it correctly. You want to make sure you calculate how much you can afford. You can start by using a mortgage estimator to get a headstart before you hire a mortgage broker to help you through the steps.
Coming up with a home budget isn’t that time-consuming and can be easy if you take the right steps. You first need to figure out how much you and your partner, if you have a co-buyer, earn each month. This includes all your revenue streams.
Once you figure out those numbers, you should write out all your housing costs and the amount you want as your down payment. This includes your annual property tax, homeowner’s insurance costs and your estimated mortgage interest rate and loan terms or how long you want to take to pay off your mortgage. A popular choice is 30 years because you are buying your forever home, but some people do find shorter loans.
If you add up all these expenses you will find out how much money you will be spending on a monthly basis. Use your mortgage calculator to make sure you are accurate about your spending and this will help you with what you can reasonably afford.
You want to make sure that you aren’t maxing out your income to buy your dream house. That is the road to financial disaster. You need to have money left over for unexpected expenses and emergencies as well as having savings for retirement.
There is a 28/36 percent rule that is tried-and-true among financial advisers. This means that you shouldn’t spend over 28 percent of your gross monthly income on housing expenses and no more than 36 percent on your total debt. You don’t want to get stuck into a 30-year home loan that is too expensive for your budget.
You also want to get a mortgage with a low interest rate in order to afford your home. This also means working on your credit score because lenders tend to give lower rates to people with higher credit scores, lowest debt and the best or most substantial down payments.
If you start working on credit score, that could mean paying down your debt. You should work on your debt-to-income ratio because the higher it is, the harder it will be to receive a mortgage, or at least a mortgage with a good interest rate. A lot of lenders won’t even consider giving someone a mortgage with a debt to income above 43 percent.
If you are in a better position to manage your monthly costs because you paid off as much of your debt as possible. Then you are paying only your mortgage, giving you more room to save and more room to feel comfortable if a home emergency, like a new water heater, arises.
You should have also considered how much you were able to put down as a down payment. The more you are able to put down the less money you are seen to be risking. All of these factors above should be considered on how much money you should be willing to spend on a house and if you are ready and able to spend the money you want to get your dream home.